Paring Uncle Sam's biggest cost

The defense budget may be big, but it runs a poor second to the real giant in US government spending, payments to individuals.

Virtually every American receives some form of payment from Uncle Sam sooner or later. The child who buys discounted milk in the school cafeteria, the disabled veteran, the student who goes to college on a low-cost loan, and the millions of retirees who draw social security checks are all part of the federal benefits system.

Such payments, called ''entitlements'' because recipients are entitled to them if they meet legal criteria, make up almost half the money the US government spends. The figure proposed for 1983 is $360 billion.

With so much money, entitlements would appear to be a logical target for those who want to chop the government budget. But that's not necessarily so. The biggest element of these programs is social security, the most politically sensitive operation in the federal government.

President Reagan, burned once while trying to tackle this hot issue, has promised not to touch social security until after a commission reports on the issue, safely after the November elections.

However, as budget deficits climb toward $100 billion, some voices are now calling for a change, especially in automatic cost-of-living raises in pensions, which cost almost $20 billion a year. In recent years social security benefits have gone up faster than wages, faster even than the cost of living for retirees.

Alice M. Rivlin, director of the Congressional Budget Office, told a congressional panel this week that ''retirement benefits have maintained their purchasing power, while wages of the working population have fallen in real terms'' because of a cost-of-living adjustment formula that overstates inflation.

She proposed reducing the annual increases by one third for all federal pension programs, saving the government $6 billion next year and $28 billion per year by 1987. Such savings would cost each beneficiary only a few dollars a week , said Dr. Rivlin. She reasoned that because social security has so many recipients, including many who have relatively high incomes, the sacrifice would be felt less keenly than in smaller entitlement programs aimed at the poor.

The Reagan administration has taken the opposite approach to cutting entitlements. It has proposed $12.8 billion in reductions, more than half from low-income programs such as food stamps, child nutrition, welfare, and medicaid, which comprise only 18 percent of entitlement costs.

Says conservative economist Mickey D. Levy, an expert in social security: ''Basically, if you look at what Reagan did last year and what he did this year, he's cutting Aid to Families with Dependent Chilren, food stamps, and so on, whereas he's not touching transfer payments available to all levels of income (social security).''

Economists, both conservative and liberal, have called for reining in social security. ''I strongly believe that a lot of recipients, especially in social security, are receiving transfers that are much higher than they need relative to what they put in,'' says Levy.

If members of Congress agree, few if any would say so in public. As one House expert on entitlements commented, ''It's a very difficult thing. They don't want to be out in front.They will play play 'follow the leader.' ''

However, discontent with huge budget deficits pushed Senate Budget Committee chairman Pete V. Domenici (R) of New Mexico this week to propose knocking out all social security raises for 1983 as part of an austerity budget plan. Sen. Ernest Hollings (D) of South Carolina has offered a similar freeze in another budget alternative.

Such plans would face massive opposition from older Americans. ''We're flatly opposed'' to reducing cost-of-living raises for social security, says James M. Hacking, lobbyist for the American Association of Retired Persons, which numbers 13 million members. One-quarter of older Americans live either below or near the poverty line, he says, and more would move into poverty without the annual raise.

Mr. Hacking sees a dark cloud in the form of budget deficits. ''If these materialize and if Congress doesn't act, then the pressure will be so great that something will go by the boards,'' he says.

Barber B. Conable Jr. of New York, ranking Republican on the House Ways and Means Committee, gives little chance to cutting into pension programs to reduce deficits. ''I don't think the American people will ever let us balance the budget on the backs of the pensioners,'' he says.

Retired persons have already made plans based on existing policies, says the congressman, and changing the formulas now would ''tear the social contract.'' He adds that the cost-of-living formula for all federal benefits could be be adjusted as part of reforming and strengthening the social security system, ''but I would hate to see it done on the basis of trying to balance the budget.''

Representative Conable defends the Reagan policy of cutting low-income programs in entitlements: ''The other entitlements (besides social security) are not given as a matter of right, but as a matter of need. They are not vested.''

However, the conservative Heritage Foundation, a policy study group, scores the President for failing to cut into what it calls ''fat entitlements.''

''The administration's 1983 budget fails to confront social security reform, even though social security consumes about one-fourth of the budget and has been rising at nearly 14 percent a year since 1973,'' says a Heritage position paper.

Beryl Anthony Jr. (D) of Arkansas, a member of the House Budget Committee, agreed recently that social security is the ''largest segment that is growing out of control.''

''It has to be examined,'' he said, but then added a cautionary note, ''If Congress does what needs to be done, we'll probably have a brand new Congress because all of us would be voted out of office.''